Many in Europe assume that Greece will ultimately have to default on a portion of its debt. In an interview with SPIEGEL, European Monetary Affairs Commissioner Olli Rehn, however, insists that debt restructuring is not on the agenda. He also discusses reports that Athens is considering a return to the drachma.

Getty Images

Tens of thousands of people in Greece attended protests over the weekend against new austerity measures.

SPIEGEL: Mr. Rehn, your Greek colleague on the European Commission, Maria Damanaki, said last week that either Athens and its lenders agree to tough sacrifices, "or we return to the drachma." Did she merely say what everyone is thinking?

Rehn: The public misunderstood my colleague's statement. She was trying to encourage her countrymen to implement the austerity program so that Greece can remain a member of the euro zone.

SPIEGEL: So you are no longer ruling out a return to the drachma?

Rehn: I do not see a withdrawal from the monetary union as a serious option. It would harm the Greek economy and be a setback for European integration. The euro is more than a currency; it's the central political project of our community. For this reason, too, we would not accept a Greek withdrawal.

SPIEGEL: But the Greeks themselves have played out the scenario of reintroducing the drachma.

Rehn: All I can say is this: I am not aware of it. We in the Commission and in the euro group are not working with such a scenario.

SPIEGEL: Then let's put it this way: What do the Greeks have to do to avoid a withdrawal from the euro zone?

Rehn: We expect Athens to do its homework, which includes reducing its deficit and privatizing government assets worth 50 billion ($71 billion).

SPIEGEL: Why so little? Greece could sell off a lot more. There is talk of 300 billion.

Rehn: It's true that the estimates are much higher. But of course it isn't possible to monetize everything in the short term. There are obstacles, such as the lack of registration of property. To help the Greeks, we are seriously thinking about establishing a privatization agency based on the model of the Treuhandanstalt (Eds. note: the institution which privatized former East German state assets following German reunification), as Eurogroup President Jean-Claude Juncker already
indicated in SPIEGEL last week.

SPIEGEL: Within your department, it is said that the Greek government employs hundreds of thousands of civil servants more than it needs.

Rehn: The public sector in Greece is very large in comparison with the overall economy. According to the reform program already underway, the government has only pledged to replace one in five civil servants who are retiring. Government salaries have also been reduced. Further cuts will be needed, but in light of the tense situation I do not wish to speculate on this issue publicly.

SPIEGEL: Why is Greece falling behind on its promised reforms?

Rehn: It has taken great pains to consolidate its public finances. However, we were already warning of certain risks in February. Since then, Athens has diverged somewhat from its original reorganization plan. The Greeks have begun talking about a debt restructuring. This curbed their enthusiasm over implementing reforms. For instance, tax evasion was simply not pursued as successfully as would have been advisable.

SPIEGEL: Do you believe that Greece will be able to raise 25 billion on the capital markets next year, as planned?

Rehn: Greece's planned return to the markets in March 2012 is a very ambitious goal, to be sure. Given the current risk premiums, a return to the markets is virtually impossible. For that reason, Greece will face some very tough decisions in the coming months.

SPIEGEL: Luxembourg Prime Minister Jean-Claude Juncker warns that the International Monetary Fund (IMF) could refuse to disburse the next loan tranche to Athens in late June.

Rehn: We Europeans see the policy conditionality eye-to-eye with the IMF. As to the next disbursements, we will wait for the conclusion of the review mission of the troika.

SPIEGEL: Greece's total debt already amounts to almost 160 percent of its economic output. How can the country ever recover?

Rehn: The country needs stronger economic growth. It achieved 0.8 percent growth in the first quarter of 2011, which was almost a percentage point more than expected. But I wouldn't draw any far-reaching conclusions from this. Greece must continue to reduce its spending and increase tax revenues. Most of all, to reduce its debt Greece will have to achieve a primary budget surplus

SPIEGEL: in other words, a revenue surplus prior to the deduction of interest on debt.

Rehn: The current reorganization program provides for a surplus of 5 percent, which can be maintained for several years, at least until 2020. Examples of other heavily debt-ridden EU member states show that this is certainly possible. Belgium achieved a primary budget surplus of more than 5 percent for more than six years. The critical question is whether Greece's political class is willing to achieve this goal, and whether Greek society possesses sufficient social staying power. The situation is very serious.

SPIEGEL: That's exactly why so many experts are thinking about a debt haircut before the situation explodes.

Rehn: A debt restructuring is not on our agenda. It would have negative consequences for the Greek financial system and could trigger a
chain reaction in the rest of Europe. A debt haircut also wouldn't solve the underlying problem: Greece has to stop living beyond its means. By contrast, a debt restructuring would weaken the pressure to reform.

SPIEGEL: There are growing calls within Germany's governing parties to involve German parliament before a euro-zone country receives funds from the planned permanent euro rescue fund, the European Stability Mechanism (ESM). Would the ESM be feasible if the German parliament had a say in payouts?

Rehn: We need the trust of the national parliaments, of course. But I doubt whether parliamentary control has to go into such great detail. In my country, Finland, the parliament has to approve every single disbursement of funds. To act effectively in a crisis, we must be capable of reacting quickly and flexibly. This should also be reflected in the mode of operation of the future bailout fund.

SPIEGEL: But you understand that the Germans don't want to become Europe's paymasters?

Rehn: In Brussels, we Finns are referred to as "English-speaking Germans," because we pursue the same economic policy principles: stability, sustainable growth and fiscal responsibility. The Germans aren't the only ones who are concerned. There is a certain aid fatigue in all of northern Europe. And we are experiencing a certain reform fatigue in southern Europe. As monetary commissioner, I feel this schizophrenia every day. We must try to build a bridge between these two camps.

SPIEGEL: Chancellor Angela Merkel
recently said "it is ... important that people in countries like Greece, Spain and Portugal are not able to retire earlier than in Germany -- that everyone exerts themselves more or less equally." Is she right?

Rehn: It's important that all EU member states take responsibility for their economic policy and keep their national budgets healthy. As long as each country complies with the rules of the Stability Pact, it can control certain areas individually. However, we must be prepared throughout Europe to adjust our economic and social policy. For example, we have to raise the retirement age because of rising life expectancy.

SPIEGEL: When will the euro zone have overcome the debt crisis?

Rehn: That depends very much on the EU and the individual member states. I am confident that we will make the necessary decisions, better sooner than later. I believe that we Europeans have more staying power than the crisis.